Thursday, February 2, 2012

CMHC Update

Many lenders "bulk insure" conventional mortgages behind the scenes. The conventional mortgage borrower doesn't pay for the insurance and each individual mortgage is not underwritten by CMHC. Instead a lender submits an entire portfolio of mortgages for insurance at a reduced rate paid by the lender after the fact.

For lenders who package and sell pools of mortgages it makes the pool more attractive to investors because the pool then has the backing of the Canadian government. For lenders who keep the mortgages on their balance sheet the government guarantee makes them a risk free asset which does not require much capital reserve to be set aside and thus does not tie up capital in unproductive reserves. In either case bulk insuring is often attractive to lenders.

However the popularity of the bulk insuring has almost filled the $600 billion dollar quota that CMHC has set for this type risk. As we get closer to that quota with no indication of when or by how much the quota will increase or even whether it will increase at all lenders are getting cautious. We have all heard that the Bank of Canada and the Ministry of finance are worried about the growth of debt in Canada and this could be one way to slow the growth of mortgage debt.

So some lenders are restricting rate specials to high ratio insured mortgages which do not fall under this restriction, or tightening up guidelines for conventional lending, especially stated income and rentals. So far it is "just in case" but it is starting to affect our market and will probably affect it more if the quota is not changed.

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